NetApp surges, yet caution remains

Analysts say data storage firm still faces economic challenges

SAN FRANCISCO (MarketWatch) — As NetApp Inc. shares climbed more than 10% Thursday following an upbeat earnings report, industry analysts still largely held on to cautious views about the market for the data-storage technology company.

NetApp’s
NTAP, -1.33%
stock climbed to as high as $30.80 a share, the first time it had been above $30 in almost a month. This after the company reported a mild gain in revenue with better-than-expected earnings for its fiscal second quarter, with a forecast that was largely in line with existing estimates.

Raymond James analyst Brian Alexander raised his rating on NetApp’s stock to outperform, or buy, from market perform following the results, saying in a research note that refreshed product lines and partnerships with other leading tech providers “should improve revenue momentum.”

The results came following what has been a rough year for NetApp’s stock, as its shares started the year at $36.27, and fell to a 52-week-low of $26.26 on Tuesday. There has also been speculation through the year that NetApp could be a target for a possible takeover by the likes of Hewlett-Packard Co.
HPQ, -0.33%
Oracle Corp.
ORCL, +0.73%
or its top storage rival, EMC Corp.
EMC, +0.41%

EMC, +0.41%
“Simply hitting numbers in this environment will trigger a relief rally for the shares, and we are encouraged,” said Caris & Co. analyst John Slack, in a research note.

Slack said NetApp’s valuation “remains tempting,” but added that “we opt not to chase the shares at these levels given what looks to be a bumpy year-end.”

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In an interview on Wednesday, NetApp CFO Nick Noviello said that the company is making progress with its customers and gaining market share, but said it didn’t want to get ahead of itself.

“There’s a variety of [macroeconomic] things coming through at the end of the year,” including the ongoing debate over what is being called the “fiscal cliff” facing the U.S. economy.

Morgan Stanley analyst Katy Huberty, who has an equal-weight, or neutral rating on NetApp’s stock, said in a research note that the company’s results managed to surpass “low investor expectations after a slew of misses” in spite of many of NetApp’s suppliers and resellers missing their own revenue targets during the quarter. Huberty also added that NetApp’s outlook “implies at least stable revenue growth” in its current business quarter.

But she remained neutral on the shares, citing “weak spending and competitive data points” in her report.

For its fiscal third quarter, NetApp forecast earnings of 53 cents to 58 cents a share, excluding one-time times, on revenue in a range of $1.58 billion to $1.68 billion. Analysts had previously forecast NetApp to earn 54 cents a share, on $1.61 billion in sales.

Brian Marshall, of ISI Group, took a more-positive view of NetApp, saying he believes the market has overly discounted the issues facing the company, which include concerns about product-revenue growth and competition from EMC.

Marshall, who has a buy rating on NetApp’s stock, said in a research note that the company remains a premier vendor in the enterprise storage market, which he called “one of the last secular growth markets in technology.” Marshall also estimated that NetApp has only taken about 15% of the total enterprise storage market, which he said was worth about $50 billion in 2011, giving the company much room or revenue expansion.

Marshall also noted NetApp’s strong cash position as a positive factor for the company, as its net cash makes up about 43% of the company’s total market capitalization. No other company that Marshall covers fits this metric, including Apple Inc.
AAPL, -0.87%
Cisco Systems Inc.
CSCO, +0.42%
and Dell Inc.
US:DELL
.

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